Productive America
Wall Street Journal
Jan. 13, 2003

When I was little, I picked cotton on Billy Joe Hopper's farm about three miles up the road from my dad's truck stop. My goal was to pick 100 pounds a day. At 3 cents a pound, I could earn $3. The adult pickers could pick over 300 pounds a day and earn $10. Income and productivity were tightly linked.

Economists define productivity—actually, labor productivity—as output per hour worked. The productivity difference cited above reflects a difference in the workers. When the mechanical cotton picker came along, its driver had a huge productivity advantage over us field hands. But that quantum leap in productivity, as usual, had more to do with capital than with labor. Economists call an increase in the ratio of capital to labor "capital deepening."

Sundown was the best time of day for little cotton pickers. We got to ride on top of a truckload of cotton on its way to the cotton gin, itself a breakthrough labor-saving, productivity-enhancing technology of an earlier day.

Billy Joe also raised chickens on his farm. He automated the window shades and lighting in his chicken houses to trick the chickens into eating more and growing faster. That increase in productivity also had more to do with capital than labor, but economists might call it an increase in multifactor productivity. Over the decades, farm productivity has risen so dramatically that less than 3 percent of our population now produces more food than 90 percent produced in the olden days.

Those who left the farm—usually the sons and daughters of the farmers rather than the farmers themselves—aren't unemployed. They went to town for factory jobs, and now their children are moving into the new service industries—moving up the food chain, so to speak. The passage of time has given us the perspective to appreciate the dramatic benefits of rising farm productivity. We don't always appreciate that the same thing has been going on in manufacturing in recent years. Flat to declining manufacturing employment is not a sign of decline in U.S. manufacturing. Just the opposite.

Productivity growth is what raises our living standards. Progress can be measured by how few workers—not how many—are needed to get the job done. The joke is that the factory of the future will employ only one man and one dog. The man is needed to feed the dog. The dog's job is to keep the man from touching the computer.

Faster productivity growth in the late 1990s was the driving force of the new economy. After rising less than 1.5 percent from the early 1970s to the early '90s, productivity growth doubled, from about 1.4 percent to 2.8 percent a year. To appreciate the significance of that, think compound interest.

The growth and productivity numbers of the New Economy period were more impressive before data revisions. Not only is the future not what it used to be, neither is the past. So, productivity growth only doubled in the new economy. I'll take it. There ought to be a law against data revisions, or a statute of limitations. There may have been more foam and less beer in the New Economy numbers than we thought, but there was still much more beer than before.

Faster productivity growth produced benefits. The economy's potential noninflationary growth rate of 2 percent to 2.5 percent increased to almost 4 percent. Estimates of the noninflationary unemployment rate of up to 6 percent declined to below 5 percent. (I would say closer to 4 percent.) Monetary policy could be easier without being inflationary. Faster growth turned budget deficits into surpluses. In summary, the economy got its mojo back. All this, of course, is old news. The new news is that productivity continued to grow during the economic slowdown. Productivity growth over the four quarters ending in third quarter 2002 averaged 5.6 percent. Productivity has grown faster lately than output—we're producing more with less labor.

No one expects productivity growth to continue at recent rates. Certainly not in the very slow fourth quarter 2002 and possibly not in the current quarter if growth fails to pick up. But the recent performance of productivity does augur well for long-term growth once we get beyond the current soft spot. The economic imperative that drove productivity growth in the '90s—increased competition due to a deregulated, free-trade, global economy—has not disappeared.

Reprinted with permission of The Wall Street Journal © 2003 Dow Jones & Company, Inc. All rights reserved.

About the Author McTeer is president and CEO of the Federal Reserve Bank of Dallas.